Beware patent trolls

These trolls may not be the characters you read about in fairy tales, but their intentions are nevertheless familiar as they seek out vulnerable companies or inventors for patents or pursue multiple large conglomerates for million-dollar licensing deals.

Patent trolls, also known as nonpracticing entities (NPEs), are rising considerably in number. According to a report from PatentFreedom – an organization launched in April 2008 to provide up-to-date information on NPEs to companies needing patent protection – more than 220 patent trolls are currently in operation.

Companies such as Samsung, Microsoft and Motorola have been continuously threatened by trolls. Without a patent reform act, a company infringing on a single patent could face court settlements for the entire operating system to which the patent belongs. Courtesy of PatentFreedom.NPEs do not make or manufacture products that require patents but instead buy others’ intellectual property and target companies perceived as breaching them. The aim of NPEs is to buy patents from small ventures that are not actively enforcing them and to make operating companies pay outstanding royalties for using them. Trolls are also notorious for filing costly infringement lawsuits against those who don’t seek patent licenses.

An ad hoc organization of companies that is lobbying for reforms to the US patent system, the Coalition for Patent Fairness, states that infringement cases have increased more than 404 percent since 1990, with a 30 percent increase in 2007 alone. Corporations such as Sony, Samsung, Hewlett-Packard, Microsoft and Time Warner have all been accused of patent infringement, and most of these companies typically go to court several times a year.

NPEs operate on the premise that most companies will fold rather than spend millions of dollars at trial in their defense. Typical trial expenses can total millions of dollars, plus the settlement charge afterward, if the company is found accountable.

The troll

Nathan Myhrvold, founder of Intellectual Ventures LLC, has acquired more than 20,000 patents from universities, bankrupt corporations and independent inventors. The patents cover a wide variety of technologies ranging from lasers to computer chips.

Nathan Myhrvold of Intellectual Ventures is considered a troll because he owns roughly 10,000 to 12,000 patent families. His tactic is not to sue large corporations for infringement but instead to intimidate them with his distinction of being the largest patent holder in the US. Courtesy of PatentFreedom.Amanda D. Francoeur, amanda.francoeur@laurin.com.
Myhrvold is considered a patent troll because he is the largest owner of intellectual property in the US and has put together the most expensive patent-licensing deals ever made. Recently, he strong-armed individual corporations into agreeing to payments between $200 million and $400 million.

Yet, unlike most patent trolls, Myhrvold hasn’t filed an infringement claim against a company since Intellectual Ventures began in 2000. Instead, he uses his stature to force businesses like Verizon Communications, Cisco Systems, Sony, Nokia, Microsoft and others into paying royalties so they won’t be sued.

However, obtaining patent rights from Myhrvold does not necessarily protect a licensee completely from infringement. If only a limited set of patents are bought, or if they’re only licensed for a short time and not renewed promptly, expanding on them could still result in litigation.

The opposition

RPX Corp. of San Francisco is a business founded in March 2008 to protect intellectual property from patent trolls. Labeling itself a “defensive patent aggregator,” the company buys patents to keep trolls from obtaining them solely for the purpose of lawsuits and royalty fees. RPX vows never to assert a member’s patents.

Companies pay a fixed annual membership fee ranging from $35,000 to $4.9 million, based on their operating incomes, and they’re given full rights to all of RPX’s patents, regardless of value. However, RPX chooses which intellectual properties to buy without consulting its members. Currently the company, backed by Kleiner Perkins Caufield & Byers and Charles River Ventures, owns more than 150 US patents and more than 60 US applications in areas of mobile technology, the Internet, radio-frequency identification and digital media. So far, the company has invested more than $40 million.

Another NPE opponent is Allied Security Trust (AST) of Poughkeepsie, N.Y. The company’s members include Verizon Communications, Google, Cisco Systems, Hewlett-Packard and Ericsson. Unlike RPX, AST is a nonprofit company and consults with its members on which patents to buy. The membership fee is put into an escrow account so the money can contribute to the purchase of more patents. AST also promises not to assert any patents, and members are given rights to all intellectual properties owned. According to its Web site, the company has 11 members and a goal of 30 to 40.

Many corporations are involved with these types of intellectual property managers because they want to avoid an expensive infringement trial, but they also want protection for valuable patents that have not yet been bought by NPEs. In an effort to repair this malfunctioning system, an amendment is being considered that could change US patent law for the better.

Patent reform act

Because of the increasingly large number of lawsuits filed by patent trolls, tech industries, along with the Coalition for Patent Fairness, are proposing the Patent Reform Act of 2008. Section 284 of Title 35 emphasizes compensation, limitations and measures for damages resulting from an infringement. Currently, even if a patent makes up only a small portion of a company’s operating system, royalty amounts are based on the entire value of an invention.

If the bill, which has been cleared by the House of Representatives, is accepted by the Senate, those costly damage settlements would be discontinued and, alternatively, the court would assign an apportioned fee that is appropriate to the infringed patent under debate. The objective is to reduce unnecessary litigations, which, in turn, could decrease the revenue that patent trolls rely on most to operate. And, in the case of Intellectual Ventures, it may help to lessen Myhrvold’s power to exact multimillion-dollar licensing deals from corporations.